IMF likely to be next Pakistan government's first stop

May 09, 2013|Reuters

By Katharine Houreld

ISLAMABAD, May 9 (Reuters) - Whoever wins Pakistan'selections has a fight on their hands - not just against theTaliban, but negotiating with international backers to provide amulti-billion-dollar bailout for a country that has habituallyused aid as a crutch to avoid reform.

Pakistan is gambling that the international community willnot allow a nuclear-armed country of 180 million people to gobust, especially one that is a hot-house for anti-Western andanti-Indian Islamist militants.

Unless the International Monetary Fund (IMF) providesanother transfusion Pakistan's finances could hit the wall inthe next six months or so. Talks have already begun.

"If they don't get an IMF loan and happily muddle along theway things are, you could be facing a default later this year,"said economist Sakib Sherani.

"But it depends on the counter-measures the government wouldtake."

The loan probably will come through, though the IMF may makethe government that wins Saturday's vote sweat over theconditions attached.

The IMF may stump up around $5 billion, Pakistani officialssay, just enough to repay the outstanding debt on an earlier $11billion package that was suspended in 2011 after economic andreform targets were missed.

The new IMF loan would likely spread repayments over five to10 years, said Shahid Amjad Chaudhry, financial adviser to thepre-election interim government.

Pakistan requires between $6-$9 billion to avoid a balanceof payments crisis, the Asian Development Bank said.

"A program is needed. That is universally recognised by allthe parties," said ADB country director Werner Liepach.

For the extra money, Islamabad will have to turn to the ADB,World Bank and other multilateral lenders, along with countrieswith whom it has compelling foreign policy ties like the UnitedStates, China and Saudi Arabia.

All sides have much at stake; Western forces need Pakistan'shelp to make an orderly withdrawal from neighbouringAfghanistan.

The United States committed to providing non-military aid,not all of it government-to-government, amounting to $1.5billion annually between 2010 and 2014.

Payments of military aid have been more erratic, often heldup at times when ties between Washington and Islamabad werestrained. In July 2012, Pakistan received $1.1 billion from theUnited States through the Coalition Support Fund, the firstpayment received since December 2010.

RESERVES RUNNING LOW

The election is a milestone for democracy. A civiliangovernment has served a full 5-year term for the first timeafter decades of sporadic coups and elections.

The outgoing government, led by the Pakistan People's Party(PPP) of President Asif Ali Zardari, has been quietly holdingtalks with the IMF for a new loan.

But there is a strong chance that negotiations will becompleted by a government led by rival Nawaz Sharif, who havesaid they may take longer to negotiate a loan. The former primeminister's Pakistan Muslim League (PML-N) is regarded as thefrontrunner in the polls.

The winner will inherit a rupee currency that haslost almost 40 percent of its value against the dollar since thelast election in 2008, and a fiscal deficit that the ADB thinkswill balloon to nearly 8 percent of gross domestic productcompared with 5.3 percent two years ago.

Official reserves held by the State Bank of Pakistan haveslumped to $6.7 billion, down from around $12 billion a yearago, providing cover for just five weeks of imports.

Debt repayments have depleted reserves, but central bankintervention to stop the rupee currency weakening beyond 100 perdollar has also played a part. The IMF estimates State Bank hasspent an average of $250 million a month since last October toprop up the rupee.

State Bank spelt out its worries in a policy statement lastmonth that noted a cumulative net capital and financial inflowof $34 million during the first eight months of the 2012/2013financial year ending in March was insufficient to finance acurrent account deficit of $700 million for the same period.

RICH WON'T PAY

Pakistan has been a regular client of the IMF since the1970s. It has entered nearly a dozen loan programmes since 1988,but only successfully completed a handful.

The IMF wants Pakistan to reduce its fiscal deficit bycutting energy subsidies that consume 2 percent of grossdomestic product per year and mainly benefit the wealthy elite.

Pakistan sells its power for 9 rupees per unit. They cost 12to produce. The problem is worsened by "line losses", often aeuphemism for influential people refusing to pay bills, thataccount for around a fifth of total power generated.

The opposition PML-N says the rich must pay before tariffsare increased.

"Reform is not even on the table," said a visibly frustratedNadeem Ul Haque. He was deputy chairman of the government-runPlanning Commission, which oversees policy and major projects,until he was fired last week for criticizing the government.